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AFP Payments Guides

Managing AR and Reducing DSO

Underwritten by MUFG Union Bank

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The current economic environment may lead to days sales outstanding (DSO) getting more attention, as companies are likely to face new challenges in terms of collecting payments from customers. AFP’s new Payments Guide provides treasury and finance professionals with insights into calculating and managing DSO, what causes certain customers to pay later than expected, and advancements in technology that can streamline DSO. There are myriad ways to improve the accounts receivable process and reduce DSO, but every organization is different. Still, this new guide can help set you on the right track to revamping your process.

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Chapter Highlights of the AFP Guide: Managing AR and Reducing DSO

1 INTRODUCTION

This guide provides insight into how treasury professionals are managing DSO across different parts of the payment process.

2 LOCKBOXES EVOLVE

The advantages of banks’ lockboxes often outweigh the costs. Even large companies with significant resources may opt for third-party solutions, to avoid the often complicated and tedious chore of matching payments to invoices. In addition, the cost differential between performing the function in-house and using a third party has fallen.

3 DSO CONSIDERATIONS

One area where companies have significant control and can shave DSO is accurate order entry, billing and delivery. Such accuracy typically requires automating those processes, and such automation can facilitate employing multiple billing cycles per month, another way to squeeze days out of DSO.

4 KNOW YOUR CUSTOMERS

Third-party solutions to reduce DSO often apply technology to what essentially is a people issue, such as incorrect billing codes or shipment delays.

“When people come and tell you they can reduce your company’s DSO, you have to recognize how much of that DSO actually relates to the payment habits of your customers.” -Matthew Johnson, Genesco Inc.

5 SOME HAVE IT EASY

For companies who receive payments after the goods or services are delivered, optimizing the subsequent steps along the payment process is essential.
Depending on their current systems and technology, customers will have different payment preferences, so it is up to the payee company to provide whatever payment channels customers want to use.

6 CASH APPLICATION COMPLICATIONS

Once bills are sent out and payments made, applying those payments to the correct customer accounts can result in errors and confusion that puts pressure on DSO.
Inundated by the standard email follow-up process, many organizations have handed over the function to bank lockboxes or turn to vendors whose software seeks to automate the process. Although new technology can shorten DSO, such as fintech, speed may not outweigh costs.

7 COLLECTIONS’ DRAG ON DSO

There are a plethora of tools to encourage customers to make payments. Some tools include tracking systems that account for a customer’s touch and contact points from start to finish.
New technology is confronting these longtime issues. Increasingly sophisticated machine learning (ML) and other types of AI are particularly appropriate solutions to help reduce companies’ DSO.

8 PREPPING FOR THE CHALLENGES AHEAD

To take full advantage of those tools, Glassmaker of The Hackett Group recommended companies must review their existing order-to-cash process for faults that may have been missed or ignored during the long economic expansion.

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